Generating new trading ideas
By Jeff Bailey
Can you give me some guidance in scanning for short-term (five to
ten day) trade possibilities? How do you come up with your
While I've been spending more time trying to cover the indices in
the Market Monitor at OptionInvestor.net and haven't had the
opportunity to profile as many individual stocks trades, there
are several ways I generate trading ideas.
Since I don't have a lot of time to really poor through the
fundamentals of a company, and I do believe fundamentals are
important, one great way to generate a list of investment/trading
ideas is to simply listen to a reputable investment show. For
instance, tonight, while I was updating the Pivot Analysis Matrix
for this week's trade, I was listening to CNBC's Luis Rukeyser
program, where the show's featured guest was Lawrence Auriana.
You may recognize his name as he and his partner Hans Utsch, have
managed the Federated Kaufmann fund (KAUFX) since 1986.
In tonight's (Friday's) show, guest host Maria Bartiromo asked
Mr. Auriana what his favorite top 4 picks were right now.
Now, I'm figuring that Mr. Auriana and his partner, along with a
their staff of analysts spend quite a bit of time poring over a
company's financials. In fact, Mr. Auriana said the Kaufmann
Fund doesn't invest in a company without first meeting with a
company's management, and visiting various business locations.
While Mr. Auriana admits there will always be the occasional
unpleasant "surprise" that even his analysis or research on one
of their holding was unable to uncover, I figure Mr. Auriana's
shop is probably on top of things, and may have a better idea
than I of a company's fundamentals, the either he, or his mutual
With that said, I'll listed to an investment manager, and if what
he says makes sense, and sounds interesting, here's what I'll do.
The first thing I'll do is pull up a point and figure chart of
The second thing I'll do is calculate the bullish vertical count
(the bearish count if the analysts says he/she is shorting it),
and see if the current level of trade, compared to the vertical
count and technicals makes sense for the stock to go on my "watch
If a stock does look/sound interesting, and the supply/demand
chart (point and figure chart) looks to CONFIRM what the analysts
said, then I begin the process of establishing action points.
Where the third step is to identify a PULLBACK level to buy the
stock, but also a BREAKOUT level to buy the stock, if demand for
the stock's shares is simply too strong that the stock doesn't
pull in to my entry point. Once these two levels are identified,
I will set both the downside alert (pullback) and upside alert
(breakout trigger) on my QCharts trading software.
The four stocks Mr. Auriana said he likes from the buy side (and
explained each one briefly as to why) were Advanced Auto Parts
(NYSE:AAP) $80.72, Central European Media (NASDAQ:CETV) $16.30
+0.74%, Orthofix Intl. (NASDAQ:OFIX) $42.71 -2.44% and Dyax Corp.
(NASDAQ:DYAX) $6.19 +0.97%.
I should note that Mr. Auriana said some stocks in his mutual
fund have been held for over 8 years. While this is truly a
longer-term investment style of management, later on I'm going to
get you in the mindset of how these fund managers buy stocks.
I'm going to quickly run through my thinking on both of the above
stocks, by simply looking at a point and figure chart. I'm not
going to show the charts here, as I've come up with a very
interesting observation yet to come, but you can follow along by
going to www.stockcharts.com and pull up FREE point and figure
charts as it relates to these four stocks.
Advanced Auto Parts (NYSE:AAP) $80.72 : AAP's point and figure
chart has been BULLISH since April (red 4 on PnF chart) when the
stock broke above its longer-term bearish resistance trend at
$49.00. After giving a double bottom sell signal in June (red 6
on a PnF chart) at 58, the stock slipped lower to $57, but in
early July (red 7) gave a triple top buy signal at $63.00, where
the column of X from $58 to $69 built the current bullish
vertical count to $94.00. Hmmm... in October (red A) the stock
generated the bullish triangle pattern when it traded $75.00.
This stock certainly looks bullish. Just for fun, I like to then
go to my Qcharts trade station, and use the technique we've
taught where I take the retracement tool, anchor at a low (how
about the March low at $36.99, and then take the other end of
retracement (100%) and attach it to the bullish vertical count
target of $94.00. Hmmm.... look at that! I've got to show you
Advanced Auto Parts (NYSE:AAP) Chart - Daily Intervals
Hmmm... this unconventional use of retracement where we anchor
the bottom and attach to the bullish vertical count does show
some tie to AAP's bar chart 38.2%, 50% and recent 80.9%
retracement. See that little dip back under the 38.2%
retracement? That's the double-bottom sell signal on the PnF
chart. There's an old PnF saying that "the first sell signal in
the upward trend is a buying opportunity." What should we have
been doing after that double bottom sell signal? How about
setting an upside alert at $63 for the triple-top buy signal?
I'm setting two alerts on my QCharts trading software. One will
actually be set for a pullback alert at $78.00, I want to be
alert at that level (Monday, maybe a week from now), and the
other alert will be set at a new 52-week high trade of $83.65.
If the stock is going to $94.00, which is the BETTER entry point?
We'll ask Mr. Auriana that question in a moment, as I'm going to
try and show you how Mr. Auriana buys stocks.
There, that was pretty quick. I'd also slap a quick retracement
bracket on this chart from that little "sell signal" low of
$56.80 and attack the upper end to $94.00 (see the $80.00 support
at 61.8% retracement?) and using the same lower anchor point of
$56.80, use the "fitted retracement" technique you learned in the
July 6, 2003 Ask the Analyst column "Fibonacci retracement. Fit
it or stack it!" and by performing a "fit" on AAP, I come up with
a 100% retracement at $89.40, where the 80.9% ties wonderfully to
Wednesday's close, the 61.8% matches nicely with that little gap
lower to $76.94, where the gap lower stopped dead in its tracks
as if some "level" were being traded as support. This one sure
Central European Media (NASDAQ:CETV) $16.30 : This is the
Kaufmann fund's largest small cap holding. Bullish vertical
count is $11.75. Stop... not interested at this point. Make no
mistake, this stock looks like a bull in a china closet, but
tough to assess a bullish target. Goodness me, look at that
spread-triple top last December at $5.50. Stock recently gave
another triple-top at $17.50, traded $18.50, but is now pulling
back. I'll bet you dimes-to-doughnuts Mr. Auriana is a buyer at
$15.50 though. More on this thought in a minute.
Orthofix Intl. (NASDAQ:OFIX) $42.71 : Hey, a bullish vertical
count of $61.00. I'm interested, but need to do some work with
retracement. Look at that spread triple-top buy signal at
$37.00! Oh yes... I took a retracement from $23.69 (the March 24
relative low) and place top at $61.00. I can see OFIX at $61.
Look at the way the bar chart ties in with 19.1% retracement of
$30.83 (August pullback)and 38.2% $38.00 (October relative high).
Setting downside alert at $40.00 (21-day and 50-day SMA $39 and
$38) and upside alert at $45.50 (new 52-week high).
Dyax Corporation (NASDAQ:DYAX) $6.19 : Oh my! Stock gave a
triple-top buy signal and broke above its longer-term bearish
resistance trend at $4.50 in early September (red 9) and ran to
$7.50, pulled back to $5.00, ran back up to $7.50, and now pulled
all the way back to $4.50 (gave a double bottom sell signal at
$4.75, fell another 25 cents to $4.50 (the first sell signal in
the upward trend was $4.75) came close to testing its bullish
support trend (first test of bullish support can be painful for
the bears as institutions are often lurking nearby) and has now
reversed up 4-boxes to $6.00. If the stock trades $8.00, then
that's a triple-top buy signal and would then have a bullish
vertical count of $16.00 being construction. Oooooo... very
tight consolidation in the bar chart and hugging that 50-day SMA
as support. Upside alert at $6.30 for a partial position (no
bullish count at this point) and pullback alert at $4.75, which
would have the stock's PnF chart sitting right on the bullish
Wow! The MARKET seems to agree with 4 of Mr. Auriana's "top
Now lets have some fun, but also try and learn just how Mr.
Auriana and most fund managers buy stocks. Check this out!
I was looking for some info on Mr. Auriana, and found a bunch of
inside trades he was making on a stock. Aha! He's dumping one
of the stocks he mentioned tonight, while pumping it on Luis
Gulp! No he isn't, he's been buying Mediware Information Systems
(NASDAQ:MEDW) $15.96 since January 31, 2001!
Check this insider trading report out, which I found at Yahoo!
Now... let's look at a PnF chart of MEDW, and try to see if we
can't figure out just how Mr. Auriana builds a position.
MEDIWARE Information Systems (MEDW) - $0.25 & $0.50 box
If there was ever a perfect example of how in institutional
investor builds a position, and even "builds a chart" on a stock,
then Mr. Auriana's SEC filings where I've circles his various
bullish entry points is that example.
I really mucked the chart up, but look at all the triple-top buy
signals on this chart, starting back in September of 2000 at
$3.50 per share when MEDW also broke above its bearish resistance
trend. Maybe Mr. Auriana only buys stocks above trend? While he
missed two triple-top buy signal entry points, he made his first
purchase at $5.88 (per the filings) on January 31, 2002.
Then, Mr. Auriana, who is a MEDW director, exercised options
worth 5,000 shares on June 28, 2002, after the stock had pulled
back to $7.00.
Hmmmm, that sell signal at $6.50 negated the prior bullish
vertical count of $9.25 (Oh... stock already achieved the bullish
vertical count when it traded $9.50) but what that first sell
signal in the upward trend probably did is shake out some weak
holders (that's OK, just recognize what happened) and then
allowed for a new bullish vertical count (X's from $7.00 to
$11.00) to then have MEDW's PnF chart building a new count to
Shoot! Mr. Auriana missed another triple-top buy signal at
$9.00. Oh well... wait for the pullback, then pick up another
15,000, where on three consecutive days, Mr. Auriana buys 5,000
each day. What probably took place this day is some type of
crossing of shares. Mr. Auriana's trader on the phone, with
another trader, whose client is a seller. Mr. Auriana probably
knows better than anyone where the stock is headed and becomes a
more aggressive buyer. He may also have wanted to "build the
chart" and keep it looking bullish.
Hmmmm... February 3rd rolls around and evidently supply (O's on a
PnF chart) of stock begins to dry up, and Mr. Auriana snaps up
another 5,000. Do you think Mr. Auriana knows something?
Shoot! Mr. Auriana missed another triple-top buy signal at
$11.50. Well, I guess not, he was loading the boat in late
January and early February at lower price levels.
Now what is he doing? On October 28th, Mr. Auriana is back at it
again. Takes down another 5,000 shares between $14.00 and
Do you kind of see how Mr. Auriana seems to be "working" the
stock higher, buying on pullback, while perhaps at times, when
stock price was much lower, where SMART MONEY knew of an eventual
outcome, was willing to take partial positions, but get some
exposure to the stock early in the game?
Now... how crazy is it to actually anchor the base of a
retracement bracket to the bottom of a stock's bar chart, and
attach the upper end to the bullish vertical count?
While the following bar char of MEDW is shown with weekly
interval bars, a swing trader could also think of the bars as
daily interval bars. With MEDW trading a new 52-week high today,
where's upside resistance and where's support? If Mr. Auriana
remains bullish on the stock, where is he most likely to be a
buyer? Do you see where were going? We're trying to get inside
the mind of Mr. Auriana, an institutional money manager, figure
out what he has been doing, and more importantly, try to figure
out what he IS GOING TO BE DOING if he's still bullish the stock,
and we would want to try and join him. He's been "right" so far.
MEDIWARE Information Systems (MEDW) - Weekly Intervals
I've really like looking at a stocks chart on both a point and
figure basis and bar chart. I've pointed to the often-times
powerful and high probability bullish patterns of the point and
figure chart known as the triple-top buy signal. Those weekly
bars show some 10% moves taking place in a single week!
If you were a market maker in the stock, how is your inventory
looking with the stock at a 52-week high? You're probably a
little light in inventory, and having to short to the market to
provide liquidity. Where are YOU and perhaps Mr. Auriana going
to be battling for stock? Where to you think an everyday
investor/trader like you and I might be looking to pick up some
shares of MEDW with a current upside target of $16.75?
While MEDW is a thinly traded stock (only 139,000 shares this
week) and may not be the best type of stock to try and trade, I
thought by showing you how Mr. Auriana, an institutional
investor, buys a stock, and how we can match his buying from the
SEC filings to how the stock was trading, what kinds of signals
it was giving, and where Mr. Auriana chooses entry points (on the
PnF chart) served as a good example as to....
Listening to an institutional money manager and his/her thoughts
on what stocks they are buying or sometimes shorting....
then use their ideas to match against the technicals.....
then have an understanding of how an institutional money manager
will go about building a position as long as they continue to
view the stock attractive.
While any "buy side" money manager that buys stock is not
necessarily the MARKET, its this kind of money we want to try and
follow, get in front of, or try and use their buying power to
drive our trades higher.
Mr. Auriana and his Kaufmann fund couldn't really do anything
about the market's decline past years as he is supposed to invest
his shareholders money in stocks. However, we as traders will
try and get inside the mind of the institutional investor/trader,
try and figure out where he/she is buying and perhaps selling, to
also choose our entry and exit points.
While I went a lot further than what the trader actually asked
for, it was by pure accident that I ran across Mr. Auriana's SEC
filings, but what a great accident to have happen.
Here's an article I stumbled across on Mr. Auriana.
This column is an information service only. The information
provided herein is not to be construed as an offer to buy or
sell securities of any kind. The Ask the Analyst picks are not
to be considered a recommendation of any stock or option but an
information resource to aid the investor in making an informed
decision regarding trading in options. It is possible at this
or some subsequent date, the editor and staff of The Option
Investor Newsletter may own, buy or sell securities presented.
All investors should consult a qualified professional before
trading in any security. The information provided has been
obtained from sources deemed reliable, but is not guaranteed
as to its accuracy.